A. Explain what is meant by the ‘cost of capital’. (2 marks)B. Mbappe Ltd has asked its financial managers to measure the cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 25% preferred stock and 35% common stock. The firm’s tax rate is 25%.DebtThe firm can sell for $850 a 10-year, $1000 par value bond paying annual interest at 20% coupon rate. To obtain the selling price a flotation cost of 5% of the par value was required in addition to a discount of $100 per bond. Preferred Stock12% preferred stock having a par value of $100 can be sold for $98.00. An additional fee of $2.00 per share must be paid to the underwriters. Common Stock The firm’s common stock is currently selling for $90 per share. The dividend expected to be paid at the end of the year is $9.00. Its dividend has grown constantly at 10% for the last few years and it is expected that, to sell more stock, new common stock must be under- priced by $10 per share and the firm must also pay $5 per share in flotation costs.
Calculate:
i. Cost of debt (after tax)
ii. Cost of preferred stock
iii. Cost of common stock
iv. Weighted Average Cost of capital for Mbappe Ltd.
